The Real Reason Home Prices Are Increasing

Dated: 12/01/2017

Views: 180

There are many unsubstantiated theories as to why home values are continuing to increase. From those who are worried that lending standards are again becoming too lenient(data shows this is untrue), to those who are concerned that prices are again approaching boom peaks because of“irrational exuberance”(this is also untrue as prices are not at peak levels when they are adjusted for inflation),there seems to be no shortage of opinion.

However, the increase in prices is easily explained bythe theory of supply & demand. Whenever there is a limited supply of an item that is in high demand, prices increase.

It is that simple. In real estate, it takes a six-month supply of existing salable inventory to maintain pricing stability. In most housing markets, anything less than six months will cause home values to appreciate and anything more than seven months will cause prices to depreciate(see chart 1).

According to theExisting Home Sales Reportfrom theNational Association of Realtors(NAR), the monthly inventory of homes has been below six months for the last four years(see chart 2).

Bottom Line

If buyer demand outpaces the current supply of existing homes for sale, prices will continue to appreciate. Nothing nefarious is taking place. It is simply the theory of supply & demand working as it should.

Jason has lived in the Golden and Arvada area for more than 25 years attending Golden High School and then later gaining a Bachelors of Science Degree in Organizational Leadership and Emergency Manage....

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